American Eagle Outfitters, Inc. (Exact name of registrant as specified in its charter)

Transcription

1 UNITED STATES SECURITIES AND E X CHANGE COMMISSION WASHINGTON, D.C FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended November 3, 2018 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number: American Eagle Outfitters, Inc. (Exact name of registrant as specified in its charter) Delaware No (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 77 Hot Metal Street, Pittsburgh, PA (Address of principal executive offices) (Zip Code) Registrant s telephone number, including area code: (412) Former name, former address and former fiscal year, if changed since last report: N/A Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES NO Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T ( of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES NO Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a small reporting company, or emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act. Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES NO Indicate the number of shares outstanding of each of the issuer s classes of common stock, as of the latest practicable date: 176,432,192 Common Shares were outstanding at December 11, 2018.

2 AMERICAN EAGLE OUTFITTERS, INC. TABLE OF CONTENTS Page Number PART I - FINANCIAL INFORMATION Item 1. Financial Statements 3 Consolidated Balance Sheets: November 3, 2018; February 3, 2018 and October 28, Consolidated Statements of Operations and Retained Earnings: 13 weeks and 39 weeks ended November 3, 2018 and October 28, Consolidated Statements of Comprehensive Income: 13 weeks and 39 weeks ended November 3, 2018 and October 28, Consolidated Statements of Cash Flows: 39 weeks ended November 3, 2018 and October 28, Notes to Consolidated Financial Statements 7 Item 2. Management s Discussion and Analysis of Financial Condition and Results of Operations 20 Item 3. Quantitative and Qualitative Disclosures about Market Risk 29 Item 4. Controls and Procedures 29 PART II - OTHER INFORMATION Item 1. Legal Proceedings 31 Item 1A. Risk Factors 31 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 31 Item 3. Defaults Upon Senior Securities N/A Item 4. Mine Safety Disclosures N/A Item 5. Other Information N/A Item 6. Exhibits 32 2

3 PART I - FINANCI AL INFORMATION ITEM 1. FINANCIAL STATEMENTS. AMERICAN EAGLE OUTFITTERS, INC. CONSOLIDATED BALANCE SHEETS November 3, February 3, October 28, (Inthousands,exceptpershareamounts) (Unaudited) (Unaudited) Assets Current assets: Cash and cash equivalents $ 279,872 $ 413,613 $ 257,527 Short-term investments 79, Merchandise inventory 591, , ,019 Accounts receivable, net 84,074 78,304 77,113 Prepaid expenses and other 87,995 78,400 61,553 Total current assets 1,123, , ,212 Property and equipment, at cost, net of accumulated depreciation 735, , ,168 Intangible assets, at cost, net of accumulated amortization 44,164 46,666 46,979 Goodwill 14,898 15,070 14,972 Non-current deferred income taxes 12,796 9,344 29,025 Other assets 50,442 52,464 54,424 Total assets $ 1,981,482 $ 1,816,313 $ 1,801,780 Liabilities and Stockholders Equity Current liabilities: Accounts payable $ 343,360 $ 236,703 $ 330,716 Accrued compensation and payroll taxes 56,991 54,324 43,561 Accrued rent 87,410 83,312 80,580 Accrued income and other taxes 29,340 12,781 17,262 Unredeemed gift cards and gift certificates 30,392 52,347 29,475 Current portion of deferred lease credits 11,337 11,203 12,887 Other liabilities and accrued expenses 48,317 34,551 38,359 Total current liabilities 607, , ,840 Non-current liabilities: Deferred lease credits 48,220 47,977 50,439 Non-current accrued income taxes 7,229 7,269 4,590 Other non-current liabilities 23,474 29,055 30,712 Total non-current liabilities 78,923 84,301 85,741 Commitments and contingencies Stockholders equity: Preferred stock, $0.01 par value; 5,000 shares authorized; none issued and outstanding Common stock, $0.01 par value; 600,000 shares authorized; 249,566 shares issued; 176,407, 177,316 and 177,084 shares outstanding, respectively 2,496 2,496 2,496 Contributed capital 565, , ,978 Accumulated other comprehensive loss (39,138) (30,795) (34,798) Retained earnings 2,002,687 1,883,592 1,812,821 Treasury stock, at cost, 73,159, 72,250 and 72,482 shares, respectively (1,235,949) (1,202,272) (1,206,298) Total stockholders equity 1,295,412 1,246,791 1,163,199 Total liabilities and stockholders equity $ 1,981,482 $ 1,816,313 $ 1,801,780 Refer to Notes to Consolidated Financial Statements 3

4 AMERICAN EAGLE OUTFITTERS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (Unaudited) 13 Weeks Ended 39 Weeks Ended November 3, October 28, November 3, October 28, (Inthousands,exceptpershareamounts) Total net revenue $ 1,003,707 $ 960,433 $ 2,791,522 $ 2,566,826 Cost of sales, including certain buying, occupancy and warehousing expenses 604, ,520 1,734,491 1,621,441 Gross profit 399, ,913 1,057, ,385 Selling, general and administrative expenses 248, , , ,842 Restructuring charges 3,695 1,568 18,888 Depreciation and amortization expense 42,416 43, , ,878 Operating income 108, , , ,777 Other income (expense), net 4,330 (13,243) 5,692 (19,574) Income before income taxes 112,963 97, , ,203 Provision for income taxes 27,491 33,947 55,687 56,997 Net income $ 85,472 $ 63,733 $ 185,734 $ 110,206 Net income per basic share $ 0.48 $ 0.36 $ 1.05 $ 0.62 Net income per diluted share $ 0.48 $ 0.36 $ 1.04 $ 0.61 Cash dividends per common share $ $ $ $ Weighted average common shares outstanding - basic 176, , , ,272 Weighted average common shares outstanding - diluted 178, , , ,260 Retained earnings, beginning $ 1,941,536 $ 1,772,233 $ 1,883,592 $ 1,775,775 Adoption of Accounting Standards Update (see Note 2) Net income 85,472 63, , ,206 Cash dividends and dividend equivalents (24,251) (22,733) (73,831) (68,119) Reissuance of treasury stock (70) (412) 7,040 (5,041) Retained earnings, ending $ 2,002,687 $ 1,812,821 $ 2,002,687 $ 1,812,821 Refer to Notes to Consolidated Financial Statements 4

5 AMERICAN EAGLE OUTFITTERS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) 13 Weeks Ended 39 Weeks Ended November 3, October 28, November 3, October 28, (Inthousands) Net income $ 85,472 $ 63,733 $ 185,734 $ 110,206 Other comprehensive income: Foreign currency translation income (expense) 6,492 (4,677) 8,343 1,504 Other comprehensive income: 6,492 (4,677) 8,343 1,504 Comprehensive income $ 91,964 $ 59,056 $ 194,077 $ 111,710 Refer to Notes to Consolidated Financial Statements 5

6 AMERICAN EAGLE OUTFITTERS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) 39 Weeks Ended November 3, October 28, (Inthousands) Operating activities: Net income $ 185,734 $ 110,206 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 131, ,370 Share-based compensation 17,833 12,056 Deferred income taxes (3,955) 19,846 Foreign currency transaction loss (gain) (1,426) (5,002) Changes in assets and liabilities: Merchandise inventory (197,120) (173,020) Accounts receivable (5,705) 9,515 Prepaid expenses and other (5,604) 16,220 Other assets (1,697) 2,872 Accounts payable 108,334 80,844 Unredeemed gift cards and gift certificates (21,724) (23,581) Deferred lease credits 374 5,287 Accrued compensation and payroll taxes 2,929 (9,499) Accrued income and other taxes 16,468 5,519 Accrued liabilities 17,444 11,467 Total adjustments 57,855 77,894 Net cash provided by operating activities 243, ,100 Investing activities: Capital expenditures for property and equipment (143,940) (134,920) Purchase of available-for-sale investments (124,829) - Sale of available-for-sale investments 44,973 - Acquisition of intangible assets (547) (645) Net cash used for investing activities (224,343) (135,565) Financing activities: Payments on capital leases (4,927) (8,705) Repurchase of common stock as part of publicly announced programs (70,332) (87,682) Repurchase of common stock from employees (19,060) (12,300) Net proceeds from stock options exercised 15, Cash dividends paid (71,312) (66,385) Net cash used for financing activities (150,135) (174,847) Effect of exchange rates changes on cash (2,852) 1,226 Net change in cash and cash equivalents (133,741) (121,086) Cash and cash equivalents - beginning of period 413, ,613 Cash and cash equivalents - end of period $ 279,872 $ 257,527 Supplemental disclosure of cash flow information: Cash paid during the period for income taxes $ 46,604 $ 36,822 Cash paid during the period for interest $ 832 $ 818 Refer to Notes to Consolidated Financial Statements 6

7 1. Interim Financial Statements AMERICAN EAGLE OUTFITTERS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The accompanying Consolidated Financial Statements of American Eagle Outfitters, Inc. (the Company ) at November 3, 2018 and October 28, 2017 and for the 13 and 39 week periods ended November 3, 2018 and October 28, 2017 have been prepared in accordance with generally accepted accounting principles in the United States of America ( GAAP ) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Certain notes and other information have been condensed or omitted from the interim Consolidated Financial Statements presented in this Quarterly Report on Form 10-Q. Therefore, these Consolidated Financial Statements should be read in conjunction with the Company s Fiscal 2017 Annual Report on Form 10-K filed on March 16, 2018 (the Fiscal 2017 Form 10-K ). In the opinion of the Company s management, all adjustments (consisting of normal recurring adjustments) that are considered necessary for a fair presentation have been included. The existence of subsequent events has been evaluated through the filing date of this Quarterly Report on Form 10-Q. As used in this report, all references to we, our and the Company refer to American Eagle Outfitters, Inc. and its wholly owned subsidiaries. American Eagle Outfitters, American Eagle, AEO and the AE Brand refer to our American Eagle Outfitters stores. Aerie refers to our Aerie by American Eagle stores. AEO Direct refers to our e-commerce operations, and Tailgate refers to our Tailgate brand of vintage, sports- inspired apparel. Todd Snyder refers to our Todd Snyder New York premium menswear brand. Our business is affected by the pattern of seasonality common to most retail apparel businesses. Historically, a large portion of total net revenue and operating income occurs in the third and fourth fiscal quarters, reflecting the increased demand during the back-to-school and year-end holiday selling seasons, respectively. The results for the current and prior periods are not necessarily indicative of future financial results. 2. Summary of Significant Accounting Policies Principles of Consolidation The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. At November 3, 2018, the Company operated in one reportable segment. Fiscal Year The Company s financial year is a 52 or 53-week year that ends on the Saturday nearest to January 31 (each such period, a Fiscal Year ). As used herein, Fiscal 2018 refers to the 52-week period ending February 2, Fiscal 2017 refers to the 53-week period ended February 3, Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of our contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. On an ongoing basis, our management reviews the Company s estimates based on currently available information. Changes in facts and circumstances may result in revised estimates. 7

8 Recent Accounting Pronouncements In February 2016, the Financial Accounting Standard Board ( FASB ) issued Accounting Standards Update ( ASU ) No , Leases( ASU ) which replaces the existing guidance in Accounting Standard Certification ( ASC ) 840, Leases. The new standard establishes a right-ofuse ( ROU ) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either financing or operating, with classification affecting the pattern of expense recognition in the Statement of Operations. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The guidance in ASU permits a Company to adopt using the modified retrospective approach for all leases existing as of the effective date and provides for certain practical expedients that the Company plans to elect. The Company will adopt the new standard in Fiscal 2019 and expects that it will result in a significant increase to its long-term assets and liabilities on the Consolidated Balance Sheets as the Company has a significant number of leases. Additionally, in July 2018, the FASB issued ASU , Targeted Improvements to Topic 842, Leases ( ASU ) which provides an additional transition method to adopt ASU We expect to use this new transition approach which allows the comparative periods presented in our financial statements to continue to be reported in accordance with ASC 840, Leases. We anticipate that we will elect the package of practical expedients allowed in the standard, which among other things, allows us to carry forward our historical lease classification. We also anticipate that we will make an accounting policy election to use the practical expedient allowed in the standard to not separate lease and non-lease components when calculating the lease liability under ASU As of November 3, 2018, the Company had undiscounted future minimum lease commitments under non-cancellable operating leases totaling approximately $1.6 billion. The Company has formed an implementation team, is substantially complete in identifying its lease population and has begun to input the required information into its existing software used to manage its leases in accordance with this new accounting standard. In February 2018, the FASB issued ASU , ReclassificationofCertainTaxEffectsFromAccumulatedOtherComprehensiveIncome( ASU ). The new guidance permits companies to reclassify the stranded tax effects of the Tax Cuts and Jobs Act (the Tax Act ) on items within accumulated other comprehensive income to retained earnings. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company will adopt ASU in Fiscal 2019 and does not expect a material impact from the adoption of this guidance to its Consolidated Financial Statements. In January 2017, the FASB issued ASU , SimplifyingtheTestforGoodwillImpairment. This ASU simplifies the accounting for goodwill impairments under Step 2 by eliminating the requirement to perform procedures to determine the fair value of the assets and liabilities of the reporting unit, including previously unrecognized assets and liabilities, in order to determine the fair value of the goodwill and any impairment charge to be recognized. Under this ASU, the impairment charge to be recognized should be the amount by which the reporting unit's carrying value exceeds the reporting unit's fair value as calculated under Step 1 provided that the loss recognized should not exceed the total amount of goodwill allocated to the reporting unit. This ASU is effective beginning in 2019 and early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, The adoption of this ASU may have a material effect on our consolidated financial statements in the event that we determine that goodwill for any of our reporting units is impaired. Foreign Currency Translation In accordance with ASC 830, ForeignCurrencyMatters, assets and liabilities denominated in foreign currencies were translated into United States dollars ( USD ) (our reporting currency) at the exchange rates prevailing at the balance sheet date. Revenues and expenses denominated in foreign currencies were translated into USD at the monthly average exchange rates for the period. Gains or losses resulting from foreign currency transactions are included in the results of operations, whereas related translation adjustments are reported as an element of other comprehensive income in accordance with ASC 220, ComprehensiveIncome. Revenue Recognition In May 2014, the FASB issued ASU No , RevenuefromContractswithCustomers( ASU ). ASU is a comprehensive new revenue recognition model that expands disclosure requirements and requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. ASU is effective for annual reporting periods beginning after December 15,

9 The Company adopted ASU on February 4, 2018 using the modified retrospective method applied to all contracts as of February 4, Results for reporting periods beginning on or after February 4, 2018 are presented under ASU , while prior peri od amounts are not adjusted and continue to be reported in accordance with our historic accounting. The Company recorded a net increase to opening retained earnings of $0.2 million as of February 4, 2018 due to the cumulative impact of adoption. The impac t was the result of accounting for customer loyalty programs using a relative stand-alone selling price method vs. incremental cost method. The Company defers a portion of the sales revenue attributed to the loyalty points and recognizes revenue when the points are redeemed or expire, consistent with the requirements of ASU Refer to the Customer Loyalty Program caption below for additional information. Additionally, ASU changes the balance sheet presentation of the Company s sales return reserve. Presentation on a gross basis is now required, consisting of a separate right of return asset and liability. These amounts are recorded within (i) Prepaid Expenses and Other and (ii) Other Liabilities and Accrued Expenses, respectively, on the Consolidated Balance Sheets. Historically, the Company presented the net sales return liability within Other Liabilities and Accrued Expenses on the Consolidated Balance Sheets. Refer to the Sales Return Reserve caption below for additional information. Revenue is recorded for store sales upon the purchase of merchandise by customers. The Company s e-commerce operation records revenue upon the customer receipt date of the merchandise. Shipping and handling revenues are included in total net revenue. Sales tax collected from customers is excluded from revenue and is included as part of accrued income and other taxes on the Company s Consolidated Balance Sheets. Revenue is recorded net of estimated and actual sales returns and promotional price reductions. The Company records the impact of adjustments to its sales return reserve quarterly within total net revenue and cost of sales. The sales return reserve reflects an estimate of sales returns based on projected merchandise returns determined through the use of historical average return percentages. Revenue is not recorded on the issuance of gift cards. A current liability is recorded upon issuance, and revenue is recognized when the gift card is redeemed for merchandise. Additionally, the Company recognizes revenue on unredeemed gift cards based on an estimate of the amounts that will not be redeemed ( gift card breakage ), determined through historical redemption trends. Gift card breakage revenue is recognized in proportion to actual gift card redemptions as a component of total net revenue. For further information on the Company s gift card program, refer to the Gift Cards caption below. The Company recognizes royalty revenue generated from its license or franchise agreements based on a percentage of merchandise sales by the licensee/franchisee. This revenue is recorded as a component of total net revenue when earned. The following table sets forth the approximate consolidated percentage of Total Net Revenue attributable to each merchandise group for each of the periods indicated: 13 Weeks Ended November 3, October 28, Men s apparel and accessories 32% 34% Women s apparel and accessories (excluding Aerie) 53% 54% Aerie 15% 12% Total 100% 100% The following table disaggregates the Company s Total Net Revenue by geography: November 3, Weeks Ended October 28, 2017 (Inthousands) Total Net Revenue: United States $ 873,840 $ 840,632 Foreign (1) 129, ,801 Total Net Revenue $ 1,003,707 $ 960,433 (1) Amounts represent sales from American Eagle and Aerie international retail stores, and e-commerce sales that are billed to and/or shipped to foreign countries and international franchise royalty revenue. 9

10 Cost of Sales, Including Certain Buying, Occupancy and Warehousing Expenses Cost of sales consists of merchandise costs, including design, sourcing, importing and inbound freight costs, as well as markdowns, shrinkage and certain promotional costs (collectively merchandise costs ) and buying, occupancy and warehousing costs. Design costs are related to the Company's Design Center operations and include compensation, travel and entertainment, supplies and samples for our design teams, as well as rent and depreciation for our Design Center. These costs are included in cost of sales as the respective inventory is sold. Buying, occupancy and warehousing costs consist of compensation, employee benefit expenses and travel and entertainment for our buyers and certain senior merchandising executives; rent and utilities related to our stores, corporate headquarters, distribution centers and other office space; freight from our distribution centers to the stores; compensation and supplies for our distribution centers, including purchasing, receiving and inspection costs; and shipping and handling costs related to our e-commerce operation. Gross profit is the difference between total net revenue and cost of sales. Selling, General and Administrative Expenses Selling, general and administrative expenses consist of compensation and employee benefit expenses, including salaries, incentives and related benefits associated with our stores and corporate headquarters. Selling, general and administrative expenses also include advertising costs, supplies for our stores and home office, communication costs, travel and entertainment, leasing costs and services purchased. Selling, general and administrative expenses do not include compensation, employee benefit expenses and travel for our design, sourcing and importing teams, our buyers and our distribution centers as these amounts are recorded in cost of sales. Additionally, selling, general and administrative expenses do not include rent and utilities related to our stores, operating costs of our distribution centers, and shipping and handling costs related to our e-commerce operations. Other Income (Expense), Net Other income, net consists primarily of allowances for uncollectible receivables, foreign currency transaction gain/loss and interest income/expense. Cash and Cash Equivalents and Short-term Investments The Company considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. As of November 3, 2018, short-term investments classified as available-for-sale included certificates of deposit, corporate bonds, and commercial paper with a maturity of greater than three months, but less than one year. As of October 28, 2017, the Company held no short or long-term investments. Refer to Note 3 to the Consolidated Financial Statements for information regarding cash and cash equivalents and short-term investments. Merchandise Inventory Merchandise inventory is valued at the lower of average cost or net realizable value, utilizing the retail method. Average cost includes merchandise design and sourcing costs and related expenses. The Company records merchandise receipts when control of the merchandise has transferred to the Company. The Company reviews its inventory levels to identify slow-moving merchandise and generally uses markdowns to clear merchandise. Additionally, the Company estimates a markdown reserve for future planned permanent markdowns related to current inventory. Markdowns may occur when inventory exceeds customer demand for reasons of style, seasonal adaptation, changes in customer preference, lack of consumer acceptance of fashion items, competition, or if it is determined that the inventory in stock will not sell at its currently ticketed price. Such markdowns may have a material adverse impact on earnings, depending on the extent and amount of inventory affected. The Company also estimates a shrinkage reserve for the period between the last physical count and the balance sheet date. The estimate for the shrinkage reserve, based on historical results, can be affected by changes in merchandise mix and changes in actual shrinkage trends. 10

11 Income Taxes The Company calculates income taxes in accordance with ASC 740, IncomeTaxes( ASC 740 ), which requires the use of the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the difference between the Consolidated Financial Statement carrying amounts of existing assets and liabilities and their respective tax bases as computed pursuant to ASC 740. Deferred tax assets and liabilities are measured using the tax rates, based on certain judgments regarding enacted tax laws and published guidance, in effect in the years when those temporary differences are expected to reverse. A valuation allowance is established against the deferred tax assets when it is more likely than not that some portion or all of the deferred taxes may not be realized. Changes in the Company s level and composition of earnings, tax laws or the deferred tax valuation allowance, as well as the results of tax audits may materially impact the Company s effective income tax rate. The Company evaluates its income tax positions in accordance with ASC 740, which prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return, including a decision whether to file or not to file in a particular jurisdiction. Under ASC 740, a tax benefit from an uncertain position may be recognized only if it is more likely than not that the position is sustainable based on its technical merits. The calculation of deferred tax assets and liabilities, as well as the decision to recognize a tax benefit from an uncertain position and to establish a valuation allowance requires management to make estimates and assumptions. The Company believes that its estimates and assumptions are reasonable, although actual results may have a positive or negative material impact on the balances of deferred tax assets and liabilities, valuation allowances or net income. Refer to Note 10 to the Consolidated Financial Statements for additional information regarding income taxes. Property and Equipment Property and equipment is recorded on the basis of cost, including costs to prepare the asset for use, with depreciation computed utilizing the straight-line method over the asset s estimated useful life. The useful lives of our major classes of assets are as follows: Buildings 25 years Leasehold improvements Lesser of 10 years or the term of the lease Fixtures and equipment Information technology 5 years 3-5 years As of November 3, 2018, the weighted average remaining useful life of our assets is approximately 8 years. In accordance with ASC 360, Property,Plant,andEquipment( ASC 360 ), the Company evaluates long-lived assets for impairment at the individual store level, which is the lowest level at which individual cash flows can be identified, for stores that have been open for a period of time sufficient to reach maturity. Impairment losses are recorded on long-lived assets used in operations when events and circumstances indicate that the assets are impaired and the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts. When events such as these occur, the impaired assets are adjusted to their estimated fair value and an impairment loss is recorded. No significant long-lived asset impairment charges were recorded during the 13 or 39 weeks ended November 3, 2018 or October 28, Refer to Note 6 to the Consolidated Financial Statements for additional information regarding property and equipment. Goodwill The Company s goodwill is primarily related to the acquisition of its importing operations, Canada business and Tailgate and Todd Snyder brands. In accordance with ASC 350, Intangibles GoodwillandOther( ASC 350 ), the Company evaluates goodwill for possible impairment on at least an annual basis and last performed an annual impairment test as of February 3, As a result of the Company s annual goodwill impairment test, the Company concluded that its goodwill was not impaired. 11

12 Intangible Assets Intangible assets are recorded on the basis of cost with amortization computed utilizing the straight-line method over the assets estimated useful lives. The Company s intangible assets, which consist primarily of trademark assets, are generally amortized over 15 to 25 years. The Company evaluates intangible assets for impairment in accordance with ASC 350 when events or circumstances indicate that the carrying value of the asset may not be recoverable. Such an evaluation includes the estimation of undiscounted future cash flows to be generated by those assets. If the sum of the estimated future undiscounted cash flows is less than the carrying amounts of the assets, then the assets are impaired and are adjusted to their estimated fair value. No intangible asset impairment charges were recorded during the 13 or 39 weeks ended November 3, 2018 or October 28, Refer to Note 7 to the Consolidated Financial Statements for additional information regarding intangible assets. Gift Cards Revenue is not recorded on the issuance of gift cards. The value of a gift card is recorded as a current liability upon issuance, and revenue is recognized when the gift card is redeemed for merchandise. The Company estimates gift card breakage and recognizes revenue in proportion to actual gift card redemptions as a component of total net revenue. The adoption of ASU did not have an impact of the Company s accounting for gift card breakage. The Company determines an estimated gift card breakage rate by continuously evaluating historical redemption data and the time when there is a remote likelihood that a gift card will be redeemed. The Company recorded $1.6 million of revenue related to gift card breakage during both the 13 weeks ended November 3, 2018 and October 28, During the 39 weeks ended November 3, 2018 and October 28, 2017, the Company recorded $6.2 million and $6.1 million, respectively, of revenue related to gift card breakage. Deferred Lease Credits Deferred lease credits represent the unamortized portion of construction allowances received from landlords related to the Company s retail stores. Construction allowances are generally comprised of cash amounts received by the Company from its landlords as part of the negotiated lease terms. The Company records a receivable and a deferred lease credit liability at the lease commencement date (date of initial possession of the store). The deferred lease credit is amortized on a straight-line basis as a reduction of rent expense over the term of the original lease (including the pre-opening build-out period). The receivable is reduced as amounts are received from the landlord. Co-branded Credit Card The Company offers a co-branded credit card (the AEO Visa Card ) and a private label credit card (the AEO Credit Card ) under the AEO and Aerie brands. These credit cards are issued by a third-party bank (the Bank ) in accordance with a credit card agreement (the Agreement ). The Company has no liability to the Bank for bad debt expense, provided that purchases are made in accordance with the Bank s procedures. We receive funding from the Bank based on the Agreement and card activity, which includes payments for new account activations and usage of the credit cards. We recognize revenue for this funding when the amounts are fixed or determinable and collectability is reasonably assured. This revenue is recorded in other revenue, which is a component of total net revenue in our Consolidated Statements of Operations and Retained Earnings. The adoption of ASU did not have an impact of the Company s accounting for the co-branded credit card. For further information on the Company s loyalty program, refer to the Customer Loyalty Program caption below. Customer Loyalty Program The Company recently launched a new, digitized loyalty program called AEO Connected TM (the Program ). This Program integrates the credit card rewards program and the AEREWARDS Ò loyalty program into one combined customer offering. Under the Program, customers accumulate points based on purchase activity and earn rewards by reaching certain point thresholds and, when reached, rewards are distributed. Customers earn rewards in the form of discount savings certificates. Rewards earned are valid through the stated expiration date, which is approximately 45 days from the 12

13 issuance date of the reward. Additional rewards are also given for key items such as jeans and bras. Rewards not redeemed during the 45-day redemption period are forfeited. Points earned under the Program on purchases at American Eagle and Aerie are accounted for in accordance with ASU The portion of the sales revenue attributed to the award points is deferred and recognized when the award is redeemed or when the points expire, using the relative stand-alone selling price method. Additionally, reward points earned using the co-branded credit card on non-aeo or Aerie purchases are accounted for in accordance with ASU As the points are earned, a current liability is recorded for the estimated cost of the award, and the impact of adjustments is recorded in cost of sales. The Company recorded a net increase to opening retained earnings of $0.2 million as of February 4, 2018 due to the cumulative impact of adoption. Sales Return Reserve Revenue is recorded net of estimated and actual sales returns and deductions for coupon redemptions and other promotions. The Company records the impact of adjustments to its sales return reserve quarterly within total net revenue and cost of sales. The net Sales Return Reserve reflects an estimate of sales returns based on projected merchandise returns determined through the use of historical average return percentages. As of November 3, 2018, the Company recorded a Right of Return Asset of $3.9 million within Prepaid Expenses and Other on the Consolidated Balance Sheet, offset by a Sales Return Reserve Liability of $11.1 million within Other Liabilities and Accrued Expenses on the Consolidated Balance Sheet. The net Sales Return Reserve Liability was $5.2 million, recorded within Other Liabilities and Accrued Expenses, at October 28, Segment Information In accordance with ASC 280, Segment Reporting( ASC 280 ), the Company has identified two operating segments (American Eagle Brand and Aerie Brand) that reflect the basis used internally to review performance and allocate resources. All operating segments have been aggregated and are presented as one reportable segment, as permitted by ASC Cash and Cash Equivalents and Short-term Investments The following table summarizes the fair market values for the Company s cash and available-for-sale short-term investments, which are recorded on the Consolidated Balance Sheets: November 3, 2018 February 3, 2018 October 28, 2017 (Inthousands) Cash and cash equivalents: Cash $ 156,250 $ 184,107 $ 185,546 Interest bearing deposits 93, ,577 71,981 Commercial paper 29,889 54,929 Total cash and cash equivalents $ 279,872 $ 413,613 $ 257,527 Short-term investments Certificates of deposit 55,000 Corporate bonds 9,997 Commercial paper 14,859 Total short-term investments 79,856 Total cash and short-term investments $ 359,728 $ 413,613 $ 257,527 For the 39 weeks ended November 3, 2018, purchases of investments were $124.8 million, partially offset by sale of investments of $45.0 million. There were no sales or purchases of investments for the 39 weeks ended October 28, Fair Value Measurements ASC 820, FairValueMeasurementDisclosures( ASC 820 ), defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosures about fair value measurements. Fair value is defined under 13

14 ASC 820 as the exit price associated with the sale of an asset or transfer of a liability in an orderly transaction between market participants at the measurement date. Financial Instruments Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. In addition, ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1 Quoted prices in active markets. Level 2 Inputs other than Level 1 that are observable, either directly or indirectly. Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. In accordance with ASC 820, the following table represents the Company s fair value hierarchy for its financial assets (cash equivalents and investments) measured at fair value on a recurring basis at November 3, 2018 and October 28, 2017: Fair Value Measurements at November 3, 2018 Quoted Market Prices in Active (Inthousands) Carrying Amount Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Cash and cash equivalents: Cash $ 156,250 $ 156,250 Interest bearing deposits 93,733 93,733 Commercial paper 29,889 29,889 Total cash and cash equivalents 279, ,872 Short-term investments Certificates of deposit 55,000 55,000 Corporate bonds 9,997 9,997 Commercial paper 14,859 14,859 Total short-term investments 79,856 79,856 Total $ 359,728 $ 359,728 Fair Value Measurements at October 28, 2017 Quoted Market Prices in Active (Inthousands) Carrying Amount Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Cash and cash equivalents: Cash $ 185,546 $ 185,546 Interest bearing deposits 71,981 71,981 Total cash and cash equivalents $ 257,527 $ 257,527 In the event the Company holds Level 3 investments, a discounted cash flow model is used to value those investments. There were no Level 3 investments at November 3, 2018 or October 28, Non-Financial Assets The Company s non-financial assets, which include goodwill, intangible assets and property and equipment, are not required to be measured at fair value on a recurring basis. However, if certain triggering events occur, or if an annual impairment test is required, and the Company is required to evaluate the non-financial asset for impairment, a resulting asset impairment would require that the non-financial asset be recorded at the estimated fair value. During the 13 and 39 weeks ended for November 3, 2018, no significant non-financial asset impairment charges were recorded. 14

15 5. Earnings per Share The following is a reconciliation between basic and diluted weighted average shares outstanding: 13 Weeks Ended 39 Weeks Ended November 3, October 28, November 3, October 28, (Inthousands) Weighted average common shares outstanding: Basic number of common shares outstanding 176, , , ,272 Dilutive effect of stock options and non-vested restricted stock 1,184 1,844 1,245 1,988 Diluted number of common shares outstanding 178, , , ,260 Equity awards to purchase approximately 0.7 million and no shares of common stock during the 13 and 39 weeks ended November 3, 2018, respectively and approximately 2.5 million shares of common stock during both the 13 and 39 weeks ended October 28, 2017, respectively, were outstanding, but were not included in the computation of weighted average diluted common share amounts as the effect of doing so would be antidilutive. Additionally, approximately 0.4 million shares of restricted stock units for the 13 and 39 weeks ended November 3, 2018, and 0.1 and 0.9 million shares of restricted stock units for the 13 and 39 weeks ended October 28, 2017, respectively, were outstanding, but not included in the computation of weighted average diluted common share amounts as the effect of doing so would be anti-dilutive. Furthermore, approximately 1.0 million and 1.3 million shares of restricted stock units for the 13 and 39 weeks ended November 3, 2018, respectively, and 0.1 million and 0.9 million shares of restricted stock units for the 13 and 39 weeks ended October 28, 2017, respectively, were not included in the computation of weighted average diluted common shares amounts because the number of shares ultimately issued is contingent on the Company s performance compared to preestablished annual performance goals. Refer to Note 9 to the Consolidated Financial Statements for additional information regarding share-based compensation. 6. Property and Equipment Property and equipment consists of the following: November 3, February 3, October 28, (Inthousands) Property and equipment, at cost $ 2,136,945 $ 2,023,875 $ 1,994,071 Less: Accumulated depreciation and impairment (1,401,231) (1,299,636) (1,267,903) Property and equipment, net $ 735,714 $ 724,239 $ 726, Intangible Assets Intangible assets consist of the following: November 3, February 3, October 28, (Inthousands) Trademarks, at cost $ 70,869 $ 70,322 $ 69,623 Less: Accumulated amortization (26,705) (23,656) (22,644) Intangible assets, net $ 44,164 $ 46,666 $ 46, Other Credit Arrangements In Fiscal 2014, the Company entered into a Credit Agreement ( Credit Agreement ) for five-year, syndicated, asset-based revolving credit facilities (the Credit Facilities ). The Credit Agreement provides senior secured revolving credit for loans and letters of credit up to $400 million, subject to customary borrowing base limitations. The Credit Facilities provide increased financial flexibility and take advantage of a favorable credit environment. 15

16 All obligations under the Credit Facilities are unconditionally guaranteed by certain subsidiaries. The obligations under the Credit Agreement are secured by a first-priority security interest in certain working capital assets of the borrowers and guaran tors, consisting primarily of cash, receivables, inventory and certain other assets and have been further se cured by first-priority lien s on certain real property. As of November 3, 2018, the Company was in compliance with the terms of the Credit Agreement and had $8.1 million outstanding in stand-by letters of credit. No loans were outstanding under the Credit Agreement as of November 3, Share-Based Compensation The Company accounts for share-based compensation under the provisions of ASC 718, Compensation-StockCompensation( ASC 718 ), which requires companies to measure and recognize compensation expense for all share-based payments at fair value. The Company adopted ASU , Compensation StockCompensation( ASU ) prospectively at the beginning of Fiscal 2017 and now records excess tax benefits and deficiencies as a discrete adjustment to income tax expense when stock awards vest or are exercised, rather than in contributed capital where they have been historically recorded. ASU also requires cash flows related to excess tax benefits from share-based compensation to be presented in operating activities, rather than separately as a financing activity, in the Consolidated Statement of Cash Flows. Total share-based compensation expense included in the Consolidated Statements of Operations and Retained Earnings for the 13 weeks and 39 weeks ended November 3, 2018 was $6.2 million ($4.7 million, net of tax) and $17.8 million ($13.7 million, net of tax), respectively, and for the 13 weeks and 39 weeks ended October 28, 2017 was $2.3 million ($1.5 million, net of tax) and $12.1 million ($7.9 million, net of tax), respectively. Stock Option Grants The Company grants both time-based and performance-based stock options. A summary of the Company s stock option activity for the 13 weeks ended November 3, 2018 follows: Weighted- Average Weighted- Average Remaining Contractual Aggregate Options Exercise Price Term Intrinsic Value (Inthousands) (Inyears) (Inthousands) Outstanding - February 3, ,190 $ Granted 715 $ Exercised (1) (993) $ Cancelled $ Outstanding - November 3, ,912 $ $ 10,507 Vested and expected to vest - November 3, ,777 $ $ 9,872 Exercisable - November 3, 2018 (2) 171 $ $ 1,256 (1) Options exercised during the 39 weeks ended November 3, 2018 had exercise prices ranging from $13.70 to $ (2) Options exercisable represent in-the-money vested options based upon the weighted-average exercise price of vested options compared to the Company s stock price on November 3, Cash received from the exercise of stock options was $15.5 million for the 39 weeks ended November 3, 2018 and $0.2 million for the 39 weeks ended October 28, The actual tax benefit realized from stock option exercises totaled $0.9 million for the 39 weeks ended November 3, 2018 and $0.7 million for the 39 weeks ended October 28, As of November 3, 2018, there was $5.7 million of unrecognized compensation expense for stock option awards that is expected to be recognized over a weighted average period of 1.9 years. 16

17 The fair value of stock options was estimate d at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: 39 Weeks Ended 39 Weeks Ended November 3, October 28, Black-Scholes Option Valuation Assumptions Risk-free interest rate (1) 2.6% 2.1% Dividend yield 2.5% 3.1% Volatility factor (2) 39.5% 38.5% Weighted-average expected term (3) 4.5 years 4.5 years (1) Based on the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected life of our stock options. (2) Based on a combination of historical volatility of the Company s common stock and implied volatility. (3) Represents the period of time options are expected to be outstanding. The weighted average expected option terms were determined based on historical experience. Restricted Stock Grants Time-based restricted stock awards are comprised of time-based restricted stock units. These awards vest over three years. Time-based restricted stock units receive dividend equivalents in the form of additional time-based restricted stock units, which are subject to the same restrictions and forfeiture provisions as the original award. Performance-based restricted stock awards include performance-based restricted stock units. These awards cliff vest at the end of a three-year period based upon the achievement of pre-established goals throughout the term of the award. Performance-based restricted stock units receive dividend equivalents in the form of additional performance-based restricted stock units, which are subject to the same restrictions and forfeiture provisions as the original award. The grant date fair value of all restricted stock awards is based on the closing market price per share of the Company s common stock or certain market conditions on the date of grant. A summary of the Company s restricted stock activity is presented in the following tables: Performance and Market-Based Time-Based Restricted Stock Restricted Stock 39 Weeks Ended 39 Weeks Ended November 3, 2018 November 3, 2018 Weighted- Average Grant Weighted-Average Grant Date Fair (Sharesinthousands) Shares Date Fair Value Shares Value Nonvested - February 3, ,189 $ ,138 $ Granted 930 $ $ Vested (1,033) $ (930) $ Cancelled (104) $ (18) $ Nonvested - November 3, ,982 $ ,888 $ As of November 3, 2018, there was $24.2 million of unrecognized compensation expense related to non-vested, time-based restricted stock unit awards that is expected to be recognized over a weighted-average period of 2.1 years. Based on current probable performance, there is $6.2 million of unrecognized compensation expense related to performance-based restricted stock unit awards which will be recognized as achievement of performance goals is probable over a one to three -year period. As of November 3, 2018, the Company had 6.9 million shares available for all equity grants. 17